We’ve seen the Bitcoin ecosystem mature in many ways over the past year. Here are some of the most important Bitcoin trends of 2015:

Bitcoin transactions per day more than doubled

In December 2014, the Bitcoin network averaged 86,038 transactions per day. In December 2015, the Bitcoin network averaged 202,869 transactions per day (as of 12/23/15). This means that daily transactions on the bitcoin network more than doubled (136% growth year over year) in 2015.

Despite the strong growth in transactions, no single use case has broken out to the mainstream. This is something to keep an eye on in 2016 and beyond.

Bitcoin became more global

The majority of Coinbase users now reside outside the U.S (international users grew from 44% to 51% of our total user base in 2015). Despite Coinbase being founded in the U.S. and gaining initial traction there, we’re now seeing exceptional international growth in countries like Brazil, the Philippines, and Indonesia.

Bitcoin volatility decreased

Volatility has been on the decline since bitcoin’s inception. In 2015, bitcoin volatility fell by 21%. More specifically, the bitcoin vs U.S. dollar exchange volatility (trailing 30 day average) fell from 3.98% to 3.15% this year. You can see some of the more volatile government backed currencies this year in the graph above for comparison.

Will bitcoin eventually become less volatile than some government backed currencies? We’ve seen some interesting debate on the topic which could point to either answer (both short and long term).

The price of bitcoin went up

The price of bitcoin gets a bit more attention than it deserves (we prefer to look at transactions per day as a better measure of how real usage is changing). However, the price still has a big impact on mining profitability, purchasing power of bitcoin holders, and consumer confidence, so it is worth addressing.

The bitcoin price went up 40% in 2015 (as of 12/23/15), making it one of the largest gainers this year vs other asset classes. As one example amongst many, gold was down roughly 10% this year.

The Bitcoin developer ecosystem grew

In 2015, the elusive “killer app” for the Bitcoin protocol did not emerge. But developer activity was strong, as suggested by the the fact that the number of Github repositories mentioning 'bitcoin’ increased by approximately 40% Y/Y. Bitcoin developer applications improve upon the core utility and utilization of bitcoin, creating value for the Bitcoin network.

Conclusion

While much of the industry shifted to focus on blockchain technology this year, we remained focused on bitcoin and saw the ecosystem grow nicely.

Here are a few major events to keep an eye on in 2016:

An emerging application layer for Bitcoin. In 2015 the infrastructure layer of bitcoin matured. With better developer APIs, the 21 Bitcoin Computer enabling a new group of bitcoin applications, and open source communities like Blockstack flourishing, we expect bitcoin applications to start to take off in 2016.

The next bitcoin halving occurs in July. Currently, 25 bitcoin are created every 10 minutes (meaning that for the price to hold constant, there needs to be net buying activity of roughly 3,600 bitcoin per day). In July 2016, the mining reward will cut in half and only 12.5 bitcoin will be created every 10 minutes. This may cause the price of bitcoin to increase if buying activity remains the same or goes up.

Bitcoin’s future will be achieved by the collective work of thousands of people around the world, and we’re proud to be playing a small part in helping bitcoin grow. As always, let us know what you think on Twitter and on Coinbase Community!

In an effort to foster further development of blockchain technology, WanXiang Blockchain Labs, a Chinese research institution, and Deloitte, one of the largest accounting and audit firms in the world, have teamed up to launch the first ever Shanghai blockchain hackathon beginning on January 8th.

“Our focus on how technology and going digital are changing the ways we live is globally orchestrated. Deloitte people from the different countries around the world [have] formed a specialized team ‘Deloitte digital’ to understand the impact how digitizations [sic] is changing every industry and ecosystems for each industry, so that we as a firm can help ourselves and our clients to adapt to this environment,” Yi Qing of Deloitte said in an interview with Bitcoin Magazine.

The hackathon, sponsored by FBS Capital with technical support provided by the Ethereum team, is open to anyone that is interested in blockchain technology. According to event’s website, the organizers hope to attract a diverse crowd, “whether you are blockchain experts, technology geeks, designers, or non-technical curious people.”

“The focus is on blockchain as a whole,” said Bo Shen, co-founder of Blockchain Labs, in an interview with Bitcoin Magazine. “Ethereum is one of the supports, but any tech is encouraged.”

The first day of the event will be focused on breaking up the participants into small teams and brainstorming ideas for the teams to build during the competition. All day Saturday will be spent hacking and on Sunday, teams will present their prototypes to the event organizers and a room of investors.

Shen explained that he is a co-founder of an investment fund with partners Vitalik Buterin and Feng Xiao. The fund is dedicated to investing in startups and applications using blockchain technology.

Along with the opportunity to pitch to investors, the organizers are also giving away $100,000 in prizes to the winners. The first place team gets $30,000, second place gets $20,000, and the third place team gets $10,000. In addition, there are three special prizes of $10,000 and a FBS Capital Special Prize of $10,000.

“The Chinese market is not to be missed. And we wish to set a global level playing field here,” said Qing. She explained that Deloitte’s goals are to “educate the market from concept to practical applications; setting up a platform for Blockchain developers cross borders to share coding experiences and ideas; engage engineers and corporate participants to explore Blockchain applications for various industries in real business world.”

We only have until midnight EST on ''''New Year's Eve'' to help a great charity we are supporting, Sunday Breakfast Rescue Mission, of Philadelphia, PA, USA. (@PhillyHomeless on Twitter)

Sunday Breakfast Rescue Mission is the third oldest Rescue Mission in the country. Founded in 1878, they have cared for the homeless in Philadelphia for more than 130 years, providing important and vital support, including food, clothing and shelter, as well as health and educational services. Their goal is not only to provide for the basic and emergency needs of the homeless population, but to help them to return to the community as self-sufficient individuals, to rebuild their lives and to contribute to Philadelphia's economy and overall quality of life.

We are helping this cause through the #SocialGiving Challenge. You can provide a hot meal for someone in need for less than two dollars! It is extremely easy to do. Please donate ''today!''

Wish you understood cryptocurrency better, but you're not sure how to start? These four FREE sites (with one inexpensive one) will teach you the ways of the blockchain, and some even offer mentorship and certification. Good luck and enjoy! It's episode 62 of The Daily Decrypt.

In this episode of SovereignBTC, John Bush interviews Juan S. Galt, journalist and bitcoin advocate, about the differences between anonymity and pseudonymity, bitcoin privacy issues, and the important crypto-fungibility.

SOVEREIGNBTC PODCAST SPONSORS

TheBitcoinBookstore - Over 50 premium bitcoin titles for your reading enjoyment. Topics include investing in bitcoin, mining, legal matters, journals on cryptocurrency, non-fiction, crypto-anarchy, beginners guides, and more. Best of all, you can buy any of our bitcoin books with bitcoin!

The Individual is Rising - Joe Withrow's cutting edge book about the primacy of the individual over the state and other centralized institutions. The book examines monetary history, presents current economic analysis focusing on the distortions created by the Federal Reserve, and makes the case that a "Great Reset" is in the works. From a solutions stand point, Joe gives insights in to how liberty, free markets, decentralization, and personal resiliency can lead towards a more free society.

Veldt Gold - Recognized and trusted in the Bitcoin community, Veldt Gold is your leader in sound money solutions. Veldt Gold will send you bitcoin in exchange for your gold and silver! They also will buy your gold and silver in exchange for bitcoin! USE COUPON CODE johnbush TO RECEIVE FREE SHIPPING ON ANY ORDER!

If one proposal excited attendees at the recentScaling Bitcoinworkshop in Hong Kong, Bitcoin Core and Blockstream developer Dr. Pieter Wuille'sSegregated Witnesswas it. Praised by many within the technical community, Segregated Witness is expected to improve Bitcoin's performance in a number of ways, while some even hope it might be the scaling solution that helps bring some peace back to the Bitcoin community.

The first and second partsof our three-part Segregated Witness series covered how it works and what it does. In this final part we explore what it means for the block-size dispute.

What is the block-size dispute again?

To see what Segregated Witness means for the block-size dispute, let’s first recap what the block-size dispute is. (Note that this is not an analysis of the arguments; just an explanation of them. If you’re well aware of these arguments, feel free to skip to the next section.)

In essence, the block-size dispute represents a trade-off between throughput and decentralization–with a touch of economics involved. The current 1 megabyte block-size limit allows the Bitcoin network to process up to seven transactions per second. “Block-size progressives” consider this much too low; as on oft-cited comparison, Visa can process thousands of transactions per second.

Undersized blocks, progressives fear, could limit Bitcoin’s potential and increase the cost of transacting on the blockchain to the point where only centralized services will utilize it, or lead to users moving to alternative payments systems, or perhaps even cause a total failure of the system.

On the other end of the spectrum, Bitcoin's “Decentralists”fear that increasing the block size too much could further centralize Bitcoin on a protocol level in several ways. For one, larger blocks take longer to propagate from one node to the next, and take longer for each individual node to verify, which further increases networkwide propagation time. This benefits miners (or pools) who find more blocks, as it means they get a head start mining on top of all blocks they find. Decentralists worry this would centralize mining into fewer pools.

Furthermore, larger blocks would increase the cost of running a full node, as it would require more bandwidth, more processing power, and more disc space to do so. This complicates using Bitcoin in a trustless manner, where users verify all transactions against the consensus rules they signed up for. Instead, it incentivizes users to trust others to verify consensus rules for them; another centralizing force.

Most Decentralists also believe some sort of block-size limit is required as an economical tool to create scarcity in blocks. This scarcity is needed, they think, to prevent atragedy of the commonstype of situation, where miners end up in a downwards spiral undercutting each other’s fees to the point where transactions are almost free. If transactions are almost free, miners will be unable to earn enough to properly secure the network.

Some Block-size Progressives believe fee pressure will establish naturally. Adding transactions increases the size of blocks, which would increase the orphan rate of outgoing blocks. This would make sure miners charge enough fees to make up for the added risk. Decentralists, however, argue this dynamic will simply result in another incentive to centralize mining, as that would prevent orphaned blocks altogether.

All of these centralizing forces, Decentralists say, could open the door to regulation of Bitcoin on a protocol level. Regulation on a protocol level, in turn, could harm Bitcoin’s censorship resistance, and therefore Bitcoin’s core value proposition.

While Decentralists acknowledge that smaller blocks limit the number of transactions that can be processed on Bitcoin's blockchain, they typically envision a future where bitcoin – the currency – is transacted over added layers, such as the Lightning Network, treechains and more.

Block-size Progressives generally like these types of additional layers, too, but not as a solution for scalability. They typically believe Bitcoin should be designed to scale “on-chain” first.

What does Segregated Witness mean for Bitcoin’s scalability?

Lets see how Wuille's Segregated Witness proposal fits in all of this.

First, Bitcoin Core developers originally explored Segregated Witness because it can solve Bitcoin's transactions malleability issue. Solving transaction malleability allows added scaling layers – such as the Lightning Network – to be rolled out faster and better. This is considered a great improvement by everyone. However, since Block-size Progressives don't accept added layers as a scaling solution, it doesn't really solve the dispute itself in a meaningful way.

Second, Segregated Witness introduces Fraud Proofs, which can offer better security for SPV-nodes (or “light wallets.”) Even with Fraud Proofs, however, SPV-nodes will not be quite as secure as full nodes, and they don’t serve as a check on the consensus rules it signed up for. Fraud Proofs will therefore probably not completely satisfy all Decentralists, and won’t really solve the dispute either.

Third, Segregated Witness allows full nodes to securely discard old signature data, saving on required disc space for full nodes. Most will consider this useful, as it decreases the cost of running a full node. Though it should be noted that alternative strategies to reduce required disc space were being rolled out in Bitcoin Core even before the introduction of Segregated Witness.

Fourth, version bytes can be used to improve Bitcoin’s performance in several ways. The use of Schnorr signatures, for instance, could speed up block verification, in turn speeding up that part of the propagation time. It’s too soon to predict to what extent this will help Bitcoin scale, but it’s certainly another improvement.

And fifth, most directly related to the block-size limit, Segregated Witness could effectively increase Bitcoin's block size. To be precise, Wuille’s proposal would allow for blocks up to some 2 megabytes of real transactions–or 4 megabytes if a miner fakes transactions designed to max out the potential.

Does Segregated Witness solve Bitcoin’s block-size dispute?

So, Wuille’s Segregated Witness proposal allows for blocks up to some 2 megabytes. But to what extent does that satisfy both Decentralists and Block-size Progressives?

One of the interesting things about Segregated Witness, is that it is an “opt-in” solution. It’s up to individual users to decide whether they want to upgrade their software to incorporate it. Users who want to use Segregated Witness can do so, and will get a “discount” on fees, as they’re effectively using less of the scarce block space. And users who don’t want to use Segregated Witness because of the increased cost of running a full node, don’t have to. As such, at least one part of the Decentralist concern–the increased cost of running a full node–is solved.

Another part of the Decentralist concern–increased propagation time–is a bit more complicated. But Wuille–himself a Decentralist–does not think the increased block size will cause problems.

Because of how Segregated Witness nodes are verified, the added verification time for individual nodes is expected to be negligible. And while propagation time from node to node might increase a bit, Wuille’s simulations suggest that the 4 megabyte maximum block size is within bounds of what the network can currently safely handle (but just barely).

As such, most DecentralistssupportSegregated Witness as a vital part of a scalability “road map,”as set out by Bitcoin Core developer Gregory Maxwell. Similar to Core developer Jeff Garzik'sBIP 102, Wuille's proposal could provide for a temporary bump to win time before blocks fill up (ifSegregated Witness works and is used as intended)–but without breaking any of the existing consensus rules.

Decentralists want to utilize this added time to work on long-term solutions, including a more durable block-size policy (perhapsflexcaps), additional scaling layers, and other optimizations.

Most Block-size Progressives, however, don’t consider an effective increase to 2 megabytes sufficient. For comparison, Bitcoin XT and Bitcoin Core developer Gavin Andresen's proposed solution, BIP (Bitcoin Improvement Proposal)101, starts with a block-limit increase to 8 megabytes, and is set to double every other year for 20 years until it reaches 8 gigabytes.

An earlier proposal by Andresen would have raised the maximum block size to 20 megabytes – which he already considered a compromise.

Moreover, estimates by some Block-size Progressives predict it could take as much as a year before Segregated Witness can start to function as a relief valve for transaction data. Because of that, some developers erring to the side of Block-size Progressives, includingGarzik, prefer a networkwide switch to increase the block-size limit, even before Segregated Witness is deployed.

And that brings us to the main issue.

On hard forks and soft forks

One of the most interesting aspects of Wuille’s Segregated Witness proposal is that it can be rolled out without breaking any of the existing consensus rules. As such, the proposal can effectively be enforced by miners only. This is called asoft fork.

A soft fork contrasts with ahard fork. A hard fork breaks the existing consensus rules, and requires all nodes on the network to implement the change. Every node that does not implement the change will be forked off the network. This could even result in two separate networks; two different types of Bitcoin. (If and how long such a situation would persist is up for debate.)

Increasing the block-size limit (the “old-fashioned way”) can be done only through a hard fork. As such, there must be consensus among all of Bitcoin’s user-base that a block-size limit increase is the best way forward.

Absent consensus, a segment of Bitcoin’s user base can attempt a hard fork, presumably hoping the rest of the user-base will implement the change after the fact. But if the rest of the user-base does not follow, the network will split. One such strategy was recently employed by R3CEV developer Mike Hearn and former Bitcoin Core lead developer Gavin Andresen through Bitcoin XT, but has not reached sufficient support so far.

Moreover, some developers – often (but not always) those in favor of a bigger block-size limit increase – prefer to deploy Segregated Witness as hard fork as well. This has several advantages over a soft fork.

First, a hard fork intends to make sure all nodes on the network adhere to the exact same rules. As such, full nodes verify whether all transactions are valid according to these rules, even transactions that do not involve their bitcoin.

Second, a hard fork would be a “cleaner” solution. While Wuille's Segregated Witness proposal, for instance, uses a clever trick to avoid breaking the existing consensus rules, it does so by utilizing parts of Bitcoin's protocol – the coinbase transaction's input – in ways it wasn't intended. Some fear that this added complexity could cause new problems in the future.

And third, because of this clever but atypical workaround, writing Bitcoin compatible software (like wallets) can be a bit more complicated.

Other developers – often (but not always) those who favor of a more conservative block-size approach – believe hard forks should only be deployed as the last available measure. The inherent risk of a hard fork, a split of the network, is something they want to avoid if at all possible. And if a hard fork must happen, for whatever reason, they maintain this should be announced and organized very far in advance to make sure every single user has had the chance to upgrade.

A soft fork, on the other hand, can be rolled out as soon as the code is ready and vetted, and miners agree. The rest of Bitcoin’s user base can upgrade if and when it pleases.

So where does that leave us?

What it comes down to, in the end, is not whether a hard fork – either to increase Bitcoin’s block size or to implement Segregated Witness – is objectively good or bad. Neither Bitcoin nor any of its developers can force Bitcoin’s user base to adhere to new consensus rules that break the existing consensus rules – that’s by design.

The real question, therefore, is whether a potential hard fork can reach consensus-support among Bitcoin’s user base. And while “consensus” is considered a vague requirement by some, few will maintain that a hard fork solution – either to increase the block-size limit or Segregated Witness – has reached consensus as of yet.

The most likely path forward for now, therefore, seems to be Maxwell’s road map. That’s the only path that does not require a hard fork any time soon, and it has been endorsed by a large segment of Bitcoin’s development community. As such, it now really only requires support from a majority of hash power.

Another hard fork attempt – perhaps by prominent industry players – can’t be ruled out, though. And, of course, Bitcoin XT is still out there as well.

At publication time of this article, this debate is not settled yet; for more discussion, see the Bitcoin developmentmailinglist.

Editor's Note: This piece was originally published on Medium by Co-Founder of Bloq Inc. & Bitcoin Core Developer Jeff Garzik and Chief Scientist of the Bitcoin Foundation & Bitcoin Core Developer Gavin Andresen

The proposed roadmap currently being discussed in the bitcoin community has some good points in that it does have a plan to accommodate more transactions, but it fails speak plainly to bitcoin users and acknowledge key downsides. The roadmap summary most relevant to bitcoin users is:

Bitcoin is shifting to a new economic policy, with possibly higher fees.

Core block size does not change; there has been zero compromise on that issue. In the face of rising transaction volume — it has doubled over the past year — getting stuck at 1M results in higher fees, notable economic changes, and suffers from increased political risk by embracing an accidentally-created economic policy tool.

Change By Design

Higher fees and reshaping the fee market impact all bitcoin users, yet it is only mentioned obliquely in paragraph 18 of the roadmap:

These proposals help […] prevent defection between the miners from undermining the fee market behavior that will eventually fund security.”

The development of a fee market and the evolution towards an ecosystem that is able to cope with block space competition should be considered healthy. […] However, the purpose of such a change should be evolution with technological growth, and not kicking the can down the road because of a fear of change in economics.”

Notable devs think it necessary to change bitcoin to a different economic system with “healthy” competition for block space. In the field today, that is accomplished by maintaining the core block size in the face of rising transaction volume — an outcome the current dev consensus has produced, and the roadmap continues.

In an optimal, transparent, open source environment, a BIP would be produced, covering a change in bitcoin’s economics to a “healthy fee market.” This would be analyzed through the lenses of technical, economic, hard fork etc. risk. This has not happened.

There would also be a related BIP describing the basic requirements for a full node in terms of RAM, CPU processing, storage and network upload bandwidth, based on experiments — not simulations — done on a platform like planet-lab.org. This would help determine quantitatively how many nodes could propagate information rapidly enough to maintain Bitcoin’s decentralized global consensus at a given block size.

As average block size approaches the 1M limit, the game theory picture changes. The accidental, artificial 1M limit becomes a Visible Hand in the market. Competition occurs not only for block space, but for developer consensus — because in this new economic system, the ability to freeze or move the 1M limit produces a system where humans — not the free market directly — wield oversize power.

By accident or design, Satoshi managed to create a working free market and push this Visible Hand years into the future by setting the limit high, well above the free market range for transaction fees. The limit served for years as a DoS limit, exponentially increasing cost-of-attack, while a free market equilibrium range established itself.

This block size debate ultimately comes down to competing economic and system survival theories. One theory is that a free market range exists for block size, in absence of a hard limit. Another theory is that a hard limit is required to forcibly constrain the free market. Stalling on core block size changes the former to the latter — uncharted territory for bitcoin.

A System-wide Upgrade To Avoid A System-wide Upgrade

The resultant bitcoin user and market view is muddled: From 2010 through Scaling Bitcoin:Montreal, it appeared that the core block size would see an increase. Following Scaling Bitcoin:Hong Kong, the roadmap abruptly switches direction to Segregated Witness (SW).

SW roll-out requires extensive software modifications just to maintain current functionality in the face of rising transaction volume. SW complicates bitcoin economics by splitting a “block” into a basket of two economic resources — core block and extended block — each with unique price incentives and (heavily intersecting) sets of actors.

In contrast, increased core block size is compatible with existing bitcoin software; Some wallets will work seamlessly with no change at all. The total number and scope of changes to wallets, databases, libraries etc. is very minimal. The high hurdle is the hard fork itself.

One of the explicit goals of the Scaling Bitcoin workshops was to funnel the chaotic core block size debate into an orderly decision making process. That did not occur. In hindsight, Scaling Bitcoin stalled a block size decision while transaction fee price and block space pressure continue to increase. Scaling Bitcoin was useful in surveying consensus on core block size. 2M appears to be the consensus most common denominator.

Skipping Hard Questions Until Too Late

The roadmap skips the short term issues of:

When are fees too high?

What is the process for changing core block size then?

Why do we need high fees at this early stage of bitcoin’s life?

Rather than an automated software system, a fixed core block size puts an economic policy tool in the hands of humans. Humans are making subjective decisions about “healthy” fee levels, what miner income should look like, and the relative expense of bitcoin transactions, rather than the free market.

Users have concerns that this roadmap and new economic direction dances obliquely around a shift of bitcoin from a network for P2P cash payments to a settlement system for as-yet-incomplete technology such as side chains or payment channels, pushing out businesses that bought into the original “P2P electronic cash” vision of bitcoin. As the RootStock white paper notes:

If Bitcoin block size is not increased via a hard-fork, when the next Bitcoin reward halves, Bitcoin transaction fees may become prohibitively high for certain applications.”

Maybe that’s inevitable. However, in the short term, we have a disappointing situation where a subset of dev consensus is disconnected from the oft-mentioned desire to increase block size on the part of users, businesses, exchanges and miners. This reshapes bitcoin in ways full of philosophical and economic conflicts of interest. As noted here, inaction changes bitcoin, sets it on a new path.

Way Forward

Bitcoin is not an academic science project. Stalling on hard questions produces tangible market changes. Few have the luxury to pause until a new payment layer is developed on top of bitcoin-1’s emerging settlement layer. Stuck-at-1M risks reversing bitcoin’s network effect by pricing users out of the core blockchain, forcing them onto centralized platforms.

A better way forward includes leadership on a definitive short term core block size decision, plain talk with users about exploring new fee market economic theories and system survival theories, and plain talk with users about the risks and possible negative consequences of getting stuck at 1M.

Core block size resolution and validation cost edge cases are the top priorities. A positive outcome of Scaling Bitcoin was a consensus of 2M, assuming some validation DoS fixes. Segregated Witness can proceed in parallel, sans the assumptions that it’s an easy change or that it mitigates economic issues described above.

And finally, to remove long term moral hazard, core block size limit should be made dynamic, put in the realm of software, outside of human hands.

Bitcoin deserves a roadmap that balances the needs of everybody who has worked hard over the last six years to grow the entire ecosystem.

As counsel for Washington, DC law firm BuckleySandler LLP, Amy Davine Kim advises clients in the areas of US regulation of international business and financial services, with a focus on AML/BSA compliance and digital payments. Kim has been increasingly active in the digital currency space, recently working with North Carolina lawmakers to shape state regulation. Here, […]

Andrew Miller is a computer science PhD student at the University of Maryland who focuses on cryptocurrency. Having gotten involved in Bitcoin in 2011 and focused on cryptocurrencies early in his research work, he is one of the most prolific researchers in the field.

Our discussion mainly focused on security aspects of Ethereum including their gas model, Proof-of-Work algorithm and plans to switch to Proof-of-Stake.

Segregated Witness, the proposal put forth by Blockstream developer Dr. Pieter Wuilee, has been trumpeted as a block size scaling solution that gets around the difficult scenarios associated with increasing the block size utilizing a hard fork.

But the problem is that, while Segregated Witness does provide benefit to the code, it misses one of the fundamental problems bitcoin has been experiencing: there are no true, long-term solutions on how to scale Bitcoin for mass-adoption. Instead, the focus has been on developing solutions on top of bitcoin. Further, the stigma associated with a hard fork acts as a hindrance to further development.

Segregated Witness 101

When looking at the block size problem, it helps to think of it as a bucket of marbles. The 1MB block size can carry a certain number of transactions the same as a bucket can only carry so many marbles. As more transactions try to fit in the block, naturally some are unable; they fall out.

What Segregated Witness does is remove the signature from the transaction and stores it in a separate data structure. By removing the signature from the transaction, the size of the that transaction decreases.

for example, the simplest possible one-input, one-output segregated witness transaction would be about 90 bytes of transaction data plus 80 or so bytes of signature—only those 90 bytes need to squeeze into the one megabyte block, instead of 170 bytes. More complicated multi-signature transactions save even more.”

Using our marble analogy, in this most basic of examples, each marble is shrunk down by approximately 47%. In essence, we find that we can have 47% more one-to-one transactions in the block size.

But at its core, Segregated Witness is compression and optimization of the code; it’s not a true scaling feature. There remains only 1MB of block space and when that fills, the problems that the network are currently experiencing come back again.

The Hard Fork Stigma

Bitcoin is at a crossroads right now. On one hand, there is a significant push to keep the blocksize at the arbitrary 1MB size—there has been no data presented suggesting this is the optimal size. And on the other hand, there is the need to prove that bitcoin can be scaled to a point where it can handle transactions from a growing user base.

The problem has to do with a stigma associated with implementing a change via a hard fork.

The concern with a hard fork is that it results in two parallel chains where the winner takes all and the losers are harmed. It can result in double spends and uncertainty as to which chain is going to win. When dealing with a market cap of over $6 billion, concern about that is certainly warranted.

But the problem is that inaction—or a decision not to act—results in the same outcome. The inability for the community to get behind a hard fork to scale bitcoin even to 2MB, as proposed by Jeff Garzik in BIP 102, can create an event as chaotic as a hard fork.

In an email to the Bitcoin Core Dev team, Garzik postulated that by not scaling bitcoin and instead pushing for higher transaction fees, it would create an economic change event, which “is a period of market chaos, where large changes to prices and sets of economic actors occurs over a short time period.”

Both are problematic and can cause significant damage to the community. However, what a proposal like BIP 102 does is get past the stigma of a hard fork and allow the developers to do what they’re good at: analyze data and make decisions based on it.

There is no doubt that there is a need to scale bitcoin. While Segregated Witness is, fundamentally, a great move, it doesn’t solve the problem that there is a stigma associated with hard forking the code, which will be an inevitable necessity to further scale the protocol.

Segregated Witness Should Hard Fork

In a series of Tweets, BitGo Engineer Jameson Lopp argued that node operators have a responsibility to keep current with software that is responsible for securing people’s money. In essence, if you’re going to run a node that is securing the Bitcoin network, which inherently is securing people’s money, the tech needs to be upgraded.

1) If you administer a computer that is used to secure people's money, you have responsibility to keep it running like a well-oiled machine.

To offer the necessary data that developers need, Segregated Witness should be pushed through as a hard fork, where those that do not upgrade are left behind. Segregated Witness is not controversial; it’s exactly what Bitcoin needs. Therefore, it would show what a hard fork is like and shake out some of the nodes that are not going to update their software.

There’s no doubt that scaling Bitcoin is a difficult conversation; however, it is going to continue coming up. Even with Segregated Witness, the network will reach a point where it needs to scale again. Compressing data can only work so much. At some point, you can’t make the marbles any smaller and you have to go find a bigger bucket.

On Episode 275 ...

This time, we're sitting in on a talk from open-source developer Warren Togami, one informed by his earlier and extensive work in the open-source Linux ecosystem. This talk is called "World Domination: What Bitcoin Must Learn from Linux's Success."